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According to a recent report, the global enterprise cyber security market size is estimated to grow 7% annually over the next few years to become a $177.5 billion industry. The industry was pegged at $107.8 billion last year. Security players like Palo Alto Networks (PANW) and Zscaler (ZS) are seeing significant growth in their revenues and investing in product upgrades, partnerships, and acquisitions to help cash in on the trend.

Palo Alto Network’s Financials

Palo Alto Network’s first quarter revenues grew 23% to $946 million, significantly ahead of the Street’s estimate of $921.48 million. Net loss narrowed to $92.2 million, or $0.97 per share, from a loss of $59.6 million, or $0.62 per share a year ago. On an adjusted basis, net income improved to $1.62 per share from a net income of $1.05 per share a year ago. The market was looking for a net income of $1.31 per share.

By segment, Product revenues grew 2.6% to $237.3 million. Subscription and support revenues grew 31.1% to $708.7 million. Among other metrics, billings improved 21% to $1.1 billion and Deferred revenues grew 31% to $3.9 billion.

For the second quarter of fiscal 2021, Palo Alto expects revenues of $975-$990 million with an EPS of $1.42-$1.44. The market was looking for revenues of $966.4 million for the quarter with EPS of $1.33, and revenues of $4.01 billion for the year with an EPS of $5.55.

Product Upgrades and Acquisition

During the quarter, Palo Alto announced several new products. Its new DLP solution that integrates with its Firewall platform is cloud-delivered, making it simple to deploy. The offering helps protect sensitive data regardless of where the customer keeps the data. It also announced a joint solution with its VM series virtual firewall and AWS Gateway Load Balancer, making it easier to launch the capability, improve the scale and performance, and reduce the cost.

It also launched Prisma Cloud 2.0, which enables customers to easily and rapidly extend their cloud security coverage in several critical areas. The new modules included in the upgrade provide additional data security, simplify discovery and protection of cloud storage data at scales and velocities common in public cloud environments, and address common data exposure issues found in cloud transformation.

Besides product upgrades, Palo Alto announced its acquisition of San Francisco-based Expanse for $800 million. Expanse offers an internet collection and attribution platform that constantly monitors the global internet, maps exposed and untracked assets that compromise organizations’ attack surfaces, evaluates and prioritizes risk, and provides mitigation solutions.

Prior to the acquisition, Expanse had raised $136 million in 4 rounds of funding from investors including New Enterprise Associates, TPG, Peter Thiel, Taylor Glover, IVP, Founders Fund, and Arianna Huffington. The acquisition will help Palo Alto enhance its Cortex product suite by creating the ability to integrate external, internal, and threat data to give organizations access to a holistic view of the enterprise.

Palo Alto’s stock is trading at $302.89 with a market capitalization of $28.84 billion. It was trading at a 52-week high of $306.00 earlier this month. The recent market turmoil had sent the stock to a 52-week low of $125.47 in March.

Earlier this year, I had suggested that Palo Alto should look at a possible acquisition of Zscaler. Zscaler’s cloud platform delivers Security as a Service and eliminates the need for traditional on-premises security appliances. As organizations continue to lose the boundaries that were contained by a traditional firewall, an acquisition of a cloud-focused security player like Zscaler could have helped accelerate Palo Alto’s presence in the space.

Zscaler’s Financials

Revenues for the Zscaler’s first quarter grew 52% to $142.6 million, ahead of the market’s forecast of $132.42 million. Net loss widened to $55 million from a net loss of $17.1 million a year ago. On an adjusted basis, EPS was $0.14, compared with the Street’s forecast of an EPS of $0.06. Among key metrics, calculated billings for the quarter grew 64% to $144.7 million. Deferred revenues grew 51% to $371.9 million.

For the second quarter, Zscaler expects revenue of $146-$148 million, with an EPS of $0.07-$0.08. The market was looking for revenues of $140.4 million with an EPS of $0.07. Zscaler expects to end the current year with revenues of $608-$612 million and an EPS of $0.37-$0.38. The Street had forecast revenues of $588.70 million with an EPS of $0.29.

Zscaler’s Partnerships

Earlier last quarter, Zscaler announced a strategic partnership with VMware (VMW) to help organizations simplify the adoption of a complete Secure Access Service Edge (SASE) architecture and implement Zero Trust security more effectively. The partnership will help customers benefit from VMWare’s expertise in cloud-delivered networking and security, and make it easier for them to deploy and operate security and networking infrastructure.

It recently expanded this partnership to integrate with their SD-WAN solution and for joint go-to-market engagements. Zscaler believes that it now has a well-established go-to-market engine that will generate long-term sustainable growth.

Zscaler is currently trading at $178.11 with a market capitalization of $23.9 billion. It had fallen to a 52-week low of $35 in March this year. It hit a 52-week high of $189.65 earlier this month.

When I had last recommended the acquisition for Palo Alto, Zscaler was trading at a valuation of $6.6 billion and Palo Alto was trading at $19 billion. Since then, Zscaler has roughly quadrupled in value with the market recognizing the value of its partnerships and growth engine. Palo Alto, on the other hand, has grown at a slower rate. Palo Alto clearly missed the boat on this one.